The short answer
A debt consolidation refinance uses a new or bigger home loan to pay out other debts, such as credit cards and personal loans. Home loan rates are often lower, so repayments can drop. But the debts are now spread over the life of your home loan and secured against your home. Moneysmart warns that consolidating can cost you more over time.
How it works
You refinance your home loan, or top up your current one, for enough to pay out the other debts. The lender pays those debts out at settlement. From then on you have one loan and one repayment.
It’s a new application. The lender assesses your income, expenses, credit history and the property, usually with a valuation. The extra borrowing needs to fit within your equity. With less than 20% equity after the top-up, lenders mortgage insurance may apply.
Why a lower rate can still cost more
A credit card might be paid off in a few years. Rolled into a 25 or 30 year home loan, the same balance is repaid over decades unless you pay it down faster. Moneysmart gives an example: $20,000 repaid over 5 years at a higher rate costs $25,496 in total, while the same $20,000 repaid over 15 years at a lower rate costs $30,379. The rate is lower, but the total is higher.
You can avoid much of this by setting repayments to clear the consolidated amount in a similar time to before. A split loan can help keep that part separate.
The checks Moneysmart suggests
- List your debts. Balances, rates, fees, any early repayment costs, remaining terms and repayments.
- Compare the whole new loan. The rate, comparison rate, all fees, the term, and whether extra repayments are allowed.
- Count the costs. Application, legal and valuation fees, and break costs on the debts you’re paying out. See the cost of refinancing.
- Test your budget. Could you still make repayments if rates rose or your income dropped?
- Be honest about spending. Consolidating only helps if the cards are closed or cleared and stay that way.
Secured against your home
Credit cards and most personal loans are unsecured. Once they’re part of your home loan, they’re secured against your home. If you can’t keep up repayments, the lender can sell the property to recover what’s owed. Moneysmart suggests considering other options before using your home as security.
Other options to look at first
- Ask your current lender for a lower rate, or about a hardship arrangement if you’re struggling.
- Ask your other lenders about changing repayments.
- A balance transfer, chosen carefully.
- The National Debt Helpline (1800 007 007) can help you work through your options.
When it can make sense
It can work when the total cost over the time you’ll take to repay is lower, your budget can handle the repayments, and you have the equity. Our refinance calculator and budget planner help you check. If you have past credit issues, read our page on refinancing with bad credit.
Mortgage broker at My Finance Consultants. Daniel compares home loan options from a panel of 40+ lenders for refinancers, investors and home buyers, by phone, evenings included. About Daniel
General information only. It doesn’t consider your objectives, financial situation or needs, and it isn’t tax, legal or financial product advice. Lending criteria, fees and charges apply.